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You don’t need a huge stack of money to start planning for retirement. On this episode of Teach Me How to Money, personal finance author Farnoosh Torabi walks us through the steps of saving with retirement goals in mind. Even if you can only save small amounts of money at first, it all adds up.
What is a risk?
The potential for an investment to lose value or money.
Farnoosh Torabi is a financial expert, host of the award-winning podcast So Money, and bestselling author of multiple books, including her latest: “When She Makes More.” You can learn more about Farnoosh at Farnoosh.TV and SoMoneyPodcast.com and follow her on Instagram @FarnooshTorabi.
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Jeremy Quittner: Welcome to Teach Me How to Money. I’m your host, Jeremy. On this week’s episode, we’ll be talking with personal finance expert, Farnoosh Torabi, but before we get to the interview, our jargon hack this week is risk. People take risks every day just walking across the street, riding your bike or even asking for a raise, but investing in the stock market also involves risk, which means that there’s uncertainty about how much money you could make or lose when you buy stocks, bonds, or other securities. Here’s the thing, you can’t make money in the stock market without some risk because investing in stocks and bonds and other securities always carry risks. Generally speaking, stocks are considered riskier than bonds. That’s because bonds pay a fixed amount of interest over time, whereas the stock price can fluctuate up and down on a daily basis based on how the company you invest in or how the market is doing. Also, funds which are baskets of stocks or bonds tend to be safer than individual securities because risk is spread among many different securities. But even within stocks and funds, some can carry more risk than others. The latest tech stock might carry more risk than a blue chip company stock that’s been around for a hundred years. Some people have a bigger risk tolerance and they’re known as aggressive investors. Others do not, and they’re known as moderate or conservative investors. If you’re comfortable with a lot of risk, your gains can be larger, but so can your losses. If you’re comfortable with less risk, your rewards might be smaller, but so too might your losses. When you’re investing you have to decide how much risk you can tolerate and invest accordingly. So that’s our jargon hack for the week. Now let’s get to the interview.
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Maybe when you think about retirement, you assume it’s 30-40 years away or just too far away to even think about and you need to set aside hundreds of thousands or even millions of dollars before you can make this dream a reality. Today we’ll be speaking with personal finance expert, Farnoosh Torabi about what it takes to retire at any age. She’s the host of the So Money podcast and the author of three books about money, including her most recent book, “When She Makes More.” Which is a guide for women who are the primary breadwinners in their families. Welcome Farnoosh!
Farnoosh Torabi: Hi Jeremy. Thanks for having me!
Jeremy: Oh, it’s great to have you on the show. Thank you so much. So can you tell us a little bit about yourself? From what I’ve read in your blog, you had your own quest trying to make money and deal with debt from a young age. So can you tell our listeners a little bit about that?
Farnoosh: Sure. Well, I suppose my passion for personal finance started very young, growing up in a Middle Eastern family. My parents, both immigrants came here for, like many immigrants, a fresh start, a better life, the American dream. And through their hard work, I really learned a lot about how hard work can pay off and how to manage your money wisely. My parents were able to basically come here with very little and gradually over time build their own version of the American dream, build wealth and all the while they were very transparent with me about money.
Jeremy: So they had conversations with you, open conversations about money?
Farnoosh: We did. Maybe other families were talking about local news or sports. We were talking about real estate and we were talking about perhaps why there were going to be layoffs at my father’s company. So pretty hard and real stuff at a young age for me.
Jeremy: Did that get the wheels turning for you in terms of thinking money’s important. It’s kind of critical here, it’s important to think about.
Farnoosh: Yeah. That it was a resource like any other and you had to really prioritize it and take care of it. I remember we couldn’t do everything that we wanted and I couldn’t go to every school trip or event. Sometimes it was because of limited resources. And so I learned early on about values and trade-offs. And I think that, while it was hard sometimes growing up with that, it was really a great lesson and I think that background allowed me to grow up with a bit of a fluency and comfort level around financial topics that my peers didn’t necessarily have. And then when it came time to kind of figure out what I wanted to do with my life and my career, I was really drawn to service journalism, helping people as a writer. And I started out as a financial writer because that’s kind of where I gravitated. I saw an opportunity also to educate young people about money. I didn’t feel like there were a lot of role models and experts that really connected with young people and my demographic. So I kind of took on that role and worked my way up through the ranks, working first as a very junior reporter at Money Magazine. And then, moving onto different platforms like television, digital, radio, always focusing on personal finance and then ventured out on my own. As a result of the recession, I got laid off, like many people, but I was fortunate that I had a book at the time that helped me to kind of create my own platform in personal finance and I’ve just been hustling ever since. And doing the good work, hopefully of helping people manage their money. As you mentioned, I have a podcast, I’ve written more books and it’s been a lot of fun and it’s always interesting to hear what people are struggling with, curious about, you know the rules of personal finance don’t change all that often.
Jeremy: No, I know there’s kind of almost like an outline you could put together about the basics of personal finance, but I do think that you hit a really interesting point, which is that people don’t like to talk about money and part of what we want to do on this podcast is get people to think about it and to talk about it. And what we’d like to talk with you about today has to do with retirement and retirement saving. And again, this idea that, “oh my gosh, that’s like a far away goal and there are a lot of other things I need to take care of financially before that may come into play.” So what would you say the biggest mistakes are that people make when it comes to retirement savings? They put it off too long and they’re not putting enough away. So you know, again, this is retire at any age is the theme. What are some big mistakes or pitfalls that people run into with that?
Farnoosh: Well, I think the biggest mindset trap that people fall into when it comes to investing, and I’m talking mostly younger people, they feel as though they don’t make enough to really prioritize investing. That it is somehow this back burner thing that first I have to deal with my debt and then I have to save and then I have to pay my bills. And then if I have money left over, I can afford to invest. And I think that is rooted in some realities. Like yeah, you’ve got student loan debt, probably you’ve got credit card debt, you’re only making a certain wage. And so yes, money is limited, but I think that it’s important to prioritize investing and put it next to all these other important goals because as we learn sometimes the hard way, often the hard way is that it’s a lot harder to play catch up in your thirties and forties to reach that goal of whatever goal you have in for retirement as opposed to if you had just started with a little bit in your twenties compounding, the power of compounding is very powerful and it is most beneficial to us when we start at a young age. And I think that people think they have to be wealthy to invest, but I always say no, but you do have to invest to be wealthy. And the earlier you start, the bigger advantage you have. I think the other misperception is that you need to dedicate a lot of your money to investing, that it somehow needs to be all of this money going into your 401(k) all the time. Do what you can, do the best that you can, but I would say even as little as $10 a day at first $15 a day or a week, whatever you can. I think that when you’re first starting out, like anything, it’s really about developing the behavior, developing the habit.
Jeremy: So it should become automatic. It should become a habit is what you’re saying.
Farnoosh: Right, and automated. It doesn’t have to be this painful process. If you work for a company where there is a 401(k) or 403(b) and you can automatically contribute out of every paycheck. Great. Take advantage of that. I did that at my first job where a 401(k) was available. Didn’t quite know what I was getting myself into, but I was, thankfully, I was encouraged by our human resources director and she said to me, “you know, we have a company match here. What that means is…”
Jeremy: Yeah, tell people what a company match is. If they don’t know what that is.
Farnoosh: Basically, this is a great benefit. If you can access this at your employer. Some employers will offer you a 401(k) match, which is essentially saying, “Hey, Jeremy, for every dollar you put in, we’ll put in 50 cents or maybe even a dollar”.
Jeremy: Up to a certain amount, right?
Farnoosh: Yeah. Up to a certain amount. Maybe it’s 5% of your income, 6% of your income. The company kind of sets the rule, but a match is generally that, it’s the company putting in something for every dollar that you put in, whether that’s 50% or the full match.
Jeremy: And that’s an incentive for you to stay, right? You don’t automatically just get that money. You have to stay for a period of time, right?
Farnoosh: Sure. Yeah. There’s usually a vesting period or it doesn’t start right away? Doesn’t kick in on the first day, but it’s for the company that the hope is that they’re going to offer this to you and then in exchange you’re going to stay, stick around. And for the employee, I mean, the benefit is great and you get basically we call it free money, you know, and it’s an opportunity for you to really maximize your contribution with just doing a fraction of it. You know? So we say a good rule of thumb is to invest, say 10% of your income in a 401(k) if you’re starting out in your 20s. And so if you’re doing 5% and your employer’s matching 5%, you’ve got effectively 10% right there, but you’ve only done 5% really of your own money.
Jeremy: Right. And so for people who don’t have a 401(k), anybody can set up a retirement savings account, right? Or practically anybody, it’s called an IRA, individual retirement account. So, you know, is that a good thing to do or think about doing?
Farnoosh: I think so. I think that the IRA, the individual retirement account is a great vehicle. There are two kinds. There’s the traditional IRA, which functions similar to a 401(k) in that the contributions can be deducted from your taxable income today. And so there’s a tax savings today with the, with the traditional Ira, the contribution limit is smaller than a 401(k). So I believe right now, this year in 2019 it is, and correct me if I’m wrong, I think it’s $6,000. Then there’s the Roth IRA, which has a similar contribution limit, but the tax implication is different. So you invest in a Roth IRA after you’ve paid your taxes and the money grows, you know, basically tax free and you get to withdraw that money from retirement without a tax burden, which is great if you believe that your tax situation is going to increase as you age, which a lot of people do think that is the case. A Roth IRA is very exciting to them. And one other thing about the Roth IRA worth mentioning is that there is an income limit to who can contribute.
Jeremy: And that’s different from the traditional IRA, right?
Farnoosh: Right. Traditional IRA anyone can contribute with their earnings. Roth IRA, it does a limit of people who can contribute as far as how much they’re making. So after I think it’s a hundred some thousand dollars you start to phase out of the Roth IRA.
Jeremy: Okay. So I read on your blog recently about a 32-year-old woman making $220,000 a year. And she said her biggest problem was that she had too much money and she had something like $800,000 in her brokerage account. And her big fear was about not being able to manage her money. She’s an extreme example on the other extreme. But I think that there’s an important lesson from that too. You know, we’re talking a lot about extreme saving to retire early, but you have to do more than just put it in a savings account. You have to manage your money and you have to manage it intelligently. So can you talk a little bit about that? We have been talking about investing, but can you, just generally talk about how you intelligently manage your money once you decide you’re going to be an extreme saver.
Farnoosh: or just to say, right. And in this case, this young woman, you know, she made a good income. What I extracted from her situation was really her biggest gripe was that she felt like she was not in control.
Jeremy: That’s incredible when you think about that, you have that much savings and that kind of a salary that you’re not in control is kind of amazing.
Farnoosh: So just to give you some more context about her situation, she had handed over a lot of her money to a financial advisor, who was earning, the standard, probably 1-1.5% investment fee.
Jeremy: That’s on the total amount invested. Right? So that’s like a nice chunk of money.
Farnoosh: Yes, exactly. Plus within her portfolio, probably some actively managed funds whereby she’s also paying a pretty decent expense ratio. So all in all compounding, I did the math for her. I was like, this is hundreds of thousands of dollars over your lifetime, in fees. So let’s think about that. Do you really need to be working with these quote unquote experts? These were people who were introduced to her from family, they were older men. And I think that we have, I think this idea that the financial world was developed by men for men run by men, targeted to men largely. And so she felt kind of quote unquote safe, working with these experienced men who had been managing her family’s money also, and I think that there’s some value in that. I’m not saying they were mismanaging her money. I think that you still need to think about what is it that you’re getting out of this relationship and can you be actually optimizing your investments better by say working with an automated platform or you know, a lower fee system. And the fact is also, you have $800,000 sitting in a portfolio. I’m sure it’s diversified if these guys did their job right, they spread your assets over a lot of different investments and it’s risk adjusted and all the good things. But what are your goals? What do you want to do with your wealth? Do you want to spread it across real estate? Do you want to travel? Do you want to start a business? I think that for her to feel more in control, I think that the very first step is to think about where does she want to be in the next 5 or 10 years.
Jeremy: This is not just for someone with a lot of money in a brokerage account. This is for anybody to think about.
Farnoosh: Anybody, right. I think there’s comfort in knowing you have money in the bank for sure. But I think to really feel like you’re doing something that is purpose-driven and that you’re in the driver’s seat is to make sure that your goals are being met. Have these advisors asked you what your goals are other than just to earn as much money on your money? Where do you want to be in 5 or 10 years? When do you want to retire? This is a lot of money and she was 32 could she take some of it out and invest in other areas? Self-Development, a business? I’m not going to say what she needs to do, but these are the questions that she should really ask herself. But starting with, “is my money being effectively managed and am I getting the best return on my investments?” Not just are the investments the right mix, but is this the right place, the 1.5% fee or whatever that I’m paying, can I do better and what am I going to be trading off if anything?
Jeremy: Great. So I wanted to run a listener question by you to see, what your thoughts are of this. It’s an interesting question this person writes in to say, investing comes with risk and most of us can’t afford to lose money. I feel defeated before I even start. How can I stay motivated? I think that’s a great question because you know, it is a little scary. It’s not like putting your money in a bank account where up to a certain amount it’s going to be insured and you’re not going to lose anything. You’re not going to make much either. But, so what advice would you give to this listener?
Farnoosh: Well, I would first really want to say that it’s important to respect your risk tolerance. I think that we all come to the investing equation with our own risk behavior, right? Some are more risk-tolerant than others. And that’s important when you’re creating a portfolio, you know, they do ask you these questions all from before they know, advisors or platforms, develop portfolios for you. They’re like if you looked at the stock market one day and saw that it was down 25%, how would that actually make you feel? And if you’re going to lose sleep over that, well, you know, I don’t think that that means that your entire portfolio should be made of bonds. But I do think that that’s something to take into consideration. That said, I think it’s important to also remind everybody, no matter what your risk tolerance is, that when it comes to investing in the market, it is a volatile thing. It has ups, it has downs. You’re going to have good days, you’re going to have terrible days, you’re gonna have okay days. The thing to remember is that investing is a long term journey.
Jeremy: So people say that a lot. What do you mean by long term?
Farnoosh: That you shouldn’t have to worry about the day-to-day fluctuations that if you look at historical trends, if you look at where we were say 30 years ago compared to today, it’s an upward trajectory. I have a lot of faith in the markets. Over time, over a long period of time, we’re talking, you know, 15, 20, 30 years where you started versus where you ended up. It’s higher and it’s much higher than had you just parked that money in a checking account. So part of it is trusting, although historical behavior doesn’t predict the future, I think that that’s a powerful thing to reflect upon that, over a 30 year period, the U.S. market, it has its moments and it has this dark period, but it also has its rallies. If you look at, for example, just a more recent example, 10 years ago. The 2009 crash.
Jeremy: Where stocks lost half of their value.
Farnoosh: Yeah, they called it the 201(k). So naturally, a lot of people fled the markets. Because they just couldn’t take any more losses. They were worried that their 201(k) was going to become a 001(k). And I think that that’s human nature. There have just been so many recent developments in behavioral finance.
Jeremy: Basically what you’re saying about from that depth, things really did recover over the last 10 years.
Farnoosh: They recover, right. So long story short, those who stayed with the market ended up winning.
Jeremy: So the 201(k) became the 601(k)s.
Farnoosh: Exactly. We’ve had one of the longest bull run markets in history. The longest, I think bull run. And you got to believe that time heals. And I would encourage people who do have a low-risk tolerance to not be watching all the talking heads on all the business channels every day. Check-in with your portfolio, quarterly auto rebalance. If you can set your portfolio to auto rebalance, which means that, when you design a portfolio in the beginning, it’s designed specific to you and your retirement horizon, how risk tolerant you are, your age and all the things. And so over time, the market could have a really positive day, like a big swing upward and your portfolio could go from being like 60% stocks to 65% stocks because of the value that has gone up in stocks in your portfolio. You don’t have to be wealthy to invest, but you do have to invest to be wealthy. If you’ve learned nothing, take that mantra with you and I’m wishing everybody all the success.
Jeremy: Great Farnoosh thank you so much for coming on the show! We’ve been talking with Farnoosh Torabi.
Farnoosh: Thank you!
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