 Good evening and welcome to another edition of Ask Me Anything. My name is Jay Gerber and we're down here this Monday evening with a live call-in program. We have an interesting topic this evening, one that probably will be of interest to just about everyone who's watching. It's Retirement Planning and I have as my guest this evening Larry Olson who is a principal with Carbohal Olson Financial Services here in Davis and Larry welcome to the program. Thanks Jay, it's a pleasure to join you tonight. Before we get into our topic which is retirement and how to plan for it, why don't you tell us a little bit about yourself. You have a pretty familiar face. I think people have seen you around town for a good many years. How'd you come to Davis and what have you been doing since you arrived? I've been in Davis since 1976. I went to school at Sac State but my wife was going to school here at Davis and we ended up getting married in 1977 and we had worked in different restaurants. I myself worked at A.J. Bumps. I think we all remember A.J. Bumps. And I was there on their opening night and my wife worked down the highway in Dixon at Cattleman's and in 1983 we had the the the gumption to take on our own restaurant and have been at Cafe California ever since. So about seven years ago my wife suggested that maybe one of us leave the business and start a new career and she made the decision that I would be the one to do that. You enjoyed the short straw? Not true. So I decided to pursue a career in the life insurance industry as I knew a recruiter for New York life. Yes. And he convinced me that I had a career in the financial services field and so for a couple of years I sold life insurance and quickly discovered that not all of a person's financial goals and aspirations can be solved through the use of life insurance and there was many other avenues for me to delve into mainly investments. Yes. So I got my securities license in 1996 and have been working diligently in the investment and planning field since. Well I'm guessing that many of the people that come to see you have an interest in retirement and planning for their retirements. I know there are other financial goals people have educating children buying properties who knows what they want to do but retirement is one that seems to affect just about everyone I guess at some point or another in our lives we will all probably retire. What is the kind of the broad definition of retirement in your from your perspective I mean what is it that. Well from the financial planning side of things retirement issues probably consume about 70 to 80 percent of what we do in our office. Yes. It takes on many different aspects from helping people you know set some goals look at what kind of lifestyle they want to have in retirement and coming up with a plan that they can put into place starting with very small investments sometimes as they grow with age their investing capabilities grow and hopefully by the time they get to that golden year we have planned well enough that they've met their goals and it's a fairly you know long ongoing process it's not a when should someone begin planning for their retirement there a particular age hopefully as early as possible but I think in reality if you can get started in the early part of your working career with a 401k plan or a pension of some type the advantages are tremendous to start in your 20s. Realistically most people don't think too much about it till they get to that magic age of about age 35 where they figure out that they're just not going to you know live forever and and that there is an end to their working career and they may want to start planning for that. I'd like to ask you to expand a little bit on you mentioned pensions and the 401k plan before we have you tell us a little more about those two terms. I want to remind everyone this is a live program so if you have a question about your retirement plan or a general question about retirement please give us a call at 757-2419. My mom promised she'd call tonight. Okay good let's hope we hear from her. All right you mentioned 401k what is a 401k? Well 401k is probably the most popular plan for private businesses in this day and age and typically what it is is a salary reduction plan where an individual may have money drawn out of their paycheck and sent off to an investment management company and then they can have a variety of decisions on how that money would be invested from a conservative to an aggressive type of an investment typically in in the mutual fund side although many 401ks now have capability for you to invest in individual stocks and individual bonds. I noticed in this morning's Sacramento B there was a lead story on 401ks I think for the first time in anyone's history the average value of the 401k has declined a little in year 2000 as opposed to 1999 and it's down even a little bit more in 2001 but that's kind of the nature of investing and markets so no big surprise in that in that story. Well when you're looking at retirement investments typically you're working with a timeline of you know 20 20 years 15 years or something like that and so people tend to be a little bit more aggressive than they might be with money that they're you're going to use in three four five years and so it's not surprising that you might get a decrease in value with the kind of markets that we've had the last two years. Are there limits on the amount of money a person could put into his or her 401k plan? In a 401k plan you can put up to $10,500 a year out of your own salary reduction yes you can have as much as 25 percent of your income put into a 401k plan when you include matching contributions and potential profit sharing that employers might do then you're getting into the more complicated types of plans that some employers will. Are there other plans that are popular and available to most working people? Well in Davis of course with the University of California right here there's a tremendous number of employees that live here in town and so we see a lot of work with a lot of people that have what's known as a 403b plan. 403b plans were started back in the early 60s by John Kennedy as a way to encourage people to go into non-profit employment and also into teaching so they made it available to both of those groups. 403b plans generally work very much like a 401k they have a little bit looser guidelines but typically they're kind of in an interchangeable type of plan. Alright now Larry when people come to you I'm guessing that one of the questions that comes up has to do with social security and the role of social security which we've had in this country for 65 years now plays in the average retirement. What do you talk what do you tell people? Well the common thought process now is amongst most investors is that social security is not going to be there for them. Do yourself have that feeling? I hesitate to go that far I think for unless maybe you're in your early 20s I think it's actually funded through the year 2030 right now so there will be a certain amount set aside for each of us as we move along. It certainly is not playing as large a role in the retirement process as it once did nor do I think people are counting on it as a major part of their retirement plan but right now it's a fairly significant portion as many times as much as 50% and many people we see that that's really their only retirement income. For someone who has contributed for I think it's 40 quarters into the plan I guess what you are sent monthly is determined by how much you paid in over your lifetime. Exactly. Yeah and that number could go as high as I think we're in the 11 to $1,200 range in the peak I think it's still under $1,300 for an individual right now per month or as couples it'd be more than that of course right depending on both they paid in. Well let's get to some of the more specific questions and again if you have questions out there we hope you'll call us at 757-2419 our guest this evening is Larry Olson. Larry what are some of the more common mistakes people make with their retirement plans? Well I think the most common mistake is that people don't get started until maybe they perceive it to be too late but you know we always encourage young clients that we see to get started as early as possible so that's probably the number one mistake is that it's one of those things that you put off in life many times especially for younger people they're not in a career that has a plan option available to them that is publicized on a daily basis to them so for many service employees people working for small businesses there's not a plan in effect for them and so they tend not to put it aside for themselves. Sometimes it takes it's a habit I guess that has to be developed and I know some parents like to start it with their children the idea that you actually save some money out of every paycheck even if it's a small paycheck at the beginning of your working career you know I think I've heard that phrase pay yourself first or some such thing and heavens I've not been able to follow that early on anyway but it's a good habit I know to take a portion a percentage of your income and well I think put it into something educating children about the financial world is something that every parent should take into account at some point that they and if they don't have the expertise to do it they have their financial advisor have their children into their office talk to them about mutual funds stocks how they how they work what happens yeah and give them an idea and then yeah like for myself my daughter you know we've tried to include her in the discussions that we have regarding our long-term financial goals set some goals for her and you know have have taught her to look in the paper and watch certain stocks and many of her classes now is in elementary school have a certain segment on that really and and she's experienced in two of her classes so I think it's something that the educational field should delve into a little bit more Larry I'm wondering if we if it would be helpful tell me if it's not helpful if we could maybe talk a little more specifically about a kind of a typical couple let's say a couple in their mid-thirties with you know not too much income not too little income but maybe one salary one part of the one salary is fifty thousand the other is 35 so there's a total combined income of eighty five thousand dollars there's a home involved probably with some mortgage payments still going on a couple of children what what kind of a saving guide would you recommend for for this kind of couple well as far as planning goes we try to approach retirement planning as just part of their overall financial plan yes and I always liken it to a mail slot cupboard where you have a number of different slots available and you set targets and goals for each one of your financial issues that you're working with so I like to see my clients have an emergency fund yes right off that's probably the most important thing I think that they have three to six months at the rule of thumb three six months and depending on what type of financial stability and job stability they have if they're if they're both individually employed and in fairly risky small businesses say a restaurant or a car wash possibly that those types of businesses fail so somebody like that may want to have a little bit more of an emergency fund set up yeah then beyond the emergency fund then we we we go through a process of trying to determine what's the most important next financial goal typically it's retirement yes then it would work towards college education for their kids yeah sometimes they have goals such as they want to upgrade their home and move to a new home or they want a second home for potentially to live in a retirement or and to enjoy in their you know leisure cabin in the mountains or something like that so it's never too early to start saving for those types of things and then as we set priorities we'll we'll target a certain amount of money each month to go into each one of those slots all right and for retirement you know I would love to see my clients be able to save 10 of their overall income in the in the wage category that we're talking about yes about 8500 to $10,000 a year now let's say this this couple is successful and being able to save that kind of money what are what are their options is and how should it be invested I mean if this kind of gets to the question of risk and I'm sure you discuss risk with your clients well risk versus reward is one of the things that we spend quite a bit of time with mutual funds are a great vehicle for small investors when you look at investing into the stock market if you want to say you have a thousand dollars to invest you can buy you know say 10 shares of a hundred dollar stock and let's just say it's General Motors yes for the sake of argument you're placing your whole thousand dollars into that one company's fortune yep whether or not they make money and are rewarded through investors perception of how successful that company is that also affects the price of when you're investing in mutual funds what you're investing in is a pooled fund so you have my money your money hundreds thousands sometimes millions and some and some funds like Fidelity Magellan things like that yeah you'll have a million investors putting money into this thing and then the investment manager is then picking maybe between 100 to 200 sometimes as many as 300 stocks so you are diversifying diversification so for a small investor you you decrease your volatility by sure diversifying in such a manner so mutual funds are probably where we start with people yes when they get to a certain level and I like to see my clients not even think about investing in individual stocks until they have at least a hundred thousand dollar portfolio of mutual funds yeah how I'm just this is a little aside because we're all aware of the fact that the investment markets here in the United States and worldwide for that matter have not had their best 18 months or so dating back to March of 2000 people still encourage people to look to the good mutual funds to get started well yeah there's an old saying you want to buy low sell high yes unfortunately investor psychology is one that they want to invest when things are going well and and typically for long-term type of investment you want to invest at regular intervals so you're catching both the lows and the highs which brings down your average cost on your purchases so that's what they call dollar cost averaging this is where you invest a set dollar amount every month every quarter so so we are encouraging people to continue investing even through the bad times for their long-term goals on a regular basis if you've come into a lump sum of money say through retirement or through inheritance or a sale of property or something like that then you might want to be very cautious in this type of a market as we've seen it can drop fairly quickly so you want to look at again diversifying across a number of different asset classes stocks bonds and when i'm talking both stocks and bonds that means stock mutual funds also yes bond mutual funds and certain amount of cash money markets and those types of investments and there's other types of fixed income investment pools such as senior floating rate funds that are basically loan funds so larry how does one decide how much of a nest they are going to need at the time they start this retirement period in their lives that's a very good question and that's one that we spend a significant amount of time with because that's that's one thing that most people want to know right off the bat is how much am i going to need in retirement yes so we go through a series of questions again and a questionnaire trying to determine what kind of lifestyle they're going to want in retirement how much typically we'll start with what are they making now and minus their putting money into retirement their house payment things that they they probably won't have to do when they are retired we can subtract out from there and so we can project that over a series of years so if they're in their early 40s we know we have roughly 18 to 20 years to work we can take into account a certain rate of inflation three to four percent somewhere in that range which it historically runs at lately it's been a little bit lower than that but inflation is the big key there and then we use assumed rates of return on their account i like to use eight percent as an assumed rate of return over time um figuring that that's very conservative and when we're looking at money that we know we're going to need at a certain point in time i like to err on the side of conservatism yes so using those assumptions we can set a target for how much we're going to have and then how what it's going to take to get there so if they're currently putting in $200 a month and they have $20,000 in their retirement account and to get to their goal they may have to raise that 250 or 300 a month yes and try to to get a little bit better rate of return so we look at how we might influence their their investment decisions and and get them to take maybe a little bit more risk or less risk sometimes now getting to that that nest egg again the purpose of that is to provide income for the duration of one's life and uh what what is i assume i think you made reference to this earlier that in retirement the the amount of income necessary is probably less hopefully your your homes paid off your kids are educated you may have other kinds of expenses but is there a rule of thumb i mean in retirement you need 60 percent of what you maybe had i think a conventional planner would would would say 60 to 70 percent of your of your current income or your working income yes is what you'd need in retirement i think realistically most people like to think that they're going to live with the same same amount of same amount of income um and i think uh with two income two wage earners in today's society it's pretty common that they're capable of saving that kind of uh of a nest egg yes and putting that yeah forward so okay so many times that there's the old philosophy of your your tax liability will be less in retirement we're finding that that's not necessarily the case that people many times are paying as high a percentage in retirement as they were in their working years so larry i got a question i want to ask you before i do i again would like to encourage our viewers this evening if you have any question about your retirement situation we have a great expert down here and larry ulson so please feel free to pick up the phone and give us a call i think the numbers on the screen larry um when i was growing up it seemed like the magic retirement age was 65 uh you know all my dad's my my friends my my friends parents worked till they were 65 and then they were kind of fully retired i sense that's different now than it was 25 50 years ago people are retiring earlier uh some people are choosing to work even though they could fully retire later they want to keep active what what kind of things are people planning on what what do they tell you well the whole retirement planning uh industry and and retirement people's view of retirement has changed dramatically and mainly around the idea that we used to work for the same company for 35 40 years we had a pension when we retired we typically retired at age 65 and nobody or very few people actually saved in a qualified retirement account meaning a pre-tax account they might save on the outside and invest in properties and and stocks and and and such but it's only been fairly a new phenomenon the last 25 to 20 years somewhere in that range that 401ks and other types of similar salary reduction plans have become popular as major employers have moved away from providing such lucrative pensions and have put company pension and have put the responsibility on to the individual employee so that has given employees a much greater stake in their retirement and much more flexibility and and many of them have chosen because they've been diligent savers have been very good at it and invested well have found that they can retire at an earlier age so it's not uncommon that people have a retirement age goal of 60 or or many people you always hear that I want to retire at 50 realistically I mean most people don't retire till let's say somebody has a retirement goal of 60 years of age because this kind of leads into my next question how many years should one plan on their nest egg supporting them I mean you what this gets into life expectancies I imagine what do you tell people well modern medicine has has dramatically altered the landscape in this area and so I typically now if you're a healthy 65 year old we try to plan on 30 years of retirement and if for people who are in their 20s that that we do projections for many times will project out past the age 100 so and when you're looking at 60 70 years of compound interest the numbers get staggering yeah and a half a percent the rate of return can mean as much as five to ten million dollars in in your overall nest egg at the end so it's it's pretty important to start paying attention so let's let's assume you've started early you've been a good diligent saver you're at that age 60 65 that you've always felt you wanted to retire and this nest egg is there and it's it's a healthy one how do you want to draw on that I mean are there there are obviously some options all right well for qualified money and then again that means money that has been put away pre-tax there are minimum distribution requirements so at age 70 and a half you have to start taking yes money you can't wait any longer than that or you start paying penalties exactly and the penalties get kind of severe if you don't take them out so but typically people will start wanting to access their retirement accounts at their retirement age of say 60 or so and and you want to focus your money and your investment portfolio your your asset allocation that means how your money is invested number one you probably are going to get more conservative with your money because you're going to be accessing it you do want to take into account that you're going to probably live for 35 40 years in retirement if your health is good at age 60 so you're going to want some growth in there so diversification is a must and then you're going to want to start accessing your money from those points that fit your overall asset allocation portfolio I suppose there's I mean these the options kind of range on the on the most conservative I annuities I know are one way of people have done right and that's a typical pension plan usually it's just an annuitization process of a lump sum of amount of money so if say you're working for the university of California you're retiring at age 65 they're going to guarantee you a certain wage every month until you die until you die you can take the second option of having it be for you both you and your spouse yes and then there's different options like that so you know you can work in that direction of of taking a pension such as that and supplementing it with your own 403 b plan or 401k plan and taking money on a regular basis typically you want to pay attention to taxation so you're not taking too much and maybe losing some of your money to taxes that you might have not had to do so Larry I hate to cut you off at this point because I'm getting the signal that we're about out of time this has really been a fast-moving program I knew I can talk I just wonder if you could summarize are there you know what are the big Larry Olson guidelines for successful retirement you have two or three points that you'd like to leave our listeners with this year well one is get started as early as possible and be true to your plan yes be realistic with it and and follow through on a regular basis and monitor your plan at least annually and if you feel intimidated by the process don't be afraid to contact a financial advisor and work with them the professionals in our field make up for whatever you might have to pay them on a typical basis I know that's true well like to thank our guest Larry Olson who has been here with us this evening telling us about retirement planning and how we can all become better at that this has been the July edition of ask me anything we'll be back here next month second Monday and I think that's the 13th of August not sure what our topic will be we may have to follow up with you Larry because I have a feeling there were a lot of things left unsaid well my mom never got through yeah she didn't get through here so again thank everyone for joining us and from the studios at Davis Community Television we'd like to bid everyone a good evening