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Joining us on this episode is Ed Chairvolotti, president and CEO of 401karat.

Today, the burden of preparing for retirement has been placed on the individual, making saving for it more important than ever. But between balancing all other aspects of their lives, the average American doesn’t have time to add managing their retirement account to their to-do list. At 401karat, our expert 401(k) advisors do the heavy lifting for you, providing quarterly allocation recommendations based on your employer’s 401(k) options.

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Bob Martin: Our guest today on this episode of Imagine America Radio is Ed Chairvolotti. Ed is with 401karat. Today’s topic is retirement planning.

Today, the burden of preparing for retirement is placed on the individual, making saving for it even more important. But between balancing all the aspects in our life, the average American doesn’t have time to add managing their retirement account to their to-do list. At 401karat, their 401(k) experts do all the heavy lifting for you, providing quarterly allocation recommendations based upon your employer’s 401(k) options.

Ed is the president of 401karat, holds an MBA, and is a certified fiduciary, which is why we couldn’t think of a better person to talk to today about this topic, which is saving for your retirement. Welcome to the show, Ed.

Ed Chairvolotti: Hey, thanks for having me.

Bob: Ed, there’s so much that we could be talking about—the retirement planning, we’ve got Roth IRAs, we’ve got 401(k)s, we’ve got employer matches, we’ve got all sorts of things. You’ve kind of narrowed it down and simplified it a little bit for our audience, which I think is really important into this three-bucket strategy. Why don’t you tell us a little bit about what the thinking is behind this three-bucket strategy?

Ed: Yeah. Well, thanks, Bob. The three-bucket strategy came from my years of being in the financial industry. It’s that everything became so complicated, and then I realized as a young adviser that most people in the United States don’t have a complicated financial life, right? Everything we own can fit into one bucket, back in the day. Well, it’s the same thing to be successful financially. All you need to do is fill three buckets.

And those three buckets are—number one is your short-term bucket, and your short-term bucket is nothing more than set aside for emergencies. And that’s short-term natural disasters—what we’re going through now, a pandemic—and additional short-term unemployment, and then short-term medical. So, because you want to keep your plan going, you’re going to have an emergency account. We’ve all been taught that by our parents or grandparents. And then our long-term bucket (bucket, actually, number three we’ll move to) is your retirement plan. And to be successful in that bucket, if you start young enough, you just need to do a little bit all the time. You don’t have to do a lot once in a while. And so those are buckets one and two, and they’re necessary. And then the third bucket, which is, of course, my favorite bucket, is your mid-term bucket, or—l call it—your lifestyle bucket. This is once you’ve started saving money in buckets one and two, you then put any additional money is available in the middle bucket. And what that bucket provides for you is vacations, new car, new home, kids’ 529 plans, anything else—that’s the catch-all bucket.

So again, Bob, just simply to be successful, you need to fill those three buckets. And the only two that are necessary are buckets one and three.

Lee Doubleday: Okay. Now, this is Lee. I’m talking to Ed Chairvolotti, president of 401karat. Now that we’ve defined the three-bucket strategy, why should someone consider using a three-bucket strategy approach? I think I’ve always been told that putting money away—as much money as I possibly can, as early as I can—is the way to go. But is that no longer true? I mean, I like what you just said about the middle bucket, having a lifestyle bucket. Can you kind of talk to that a little?

Ed: Yeah. All of us have been touched by things like cancer and some of our friends or our family have never lived a full long life, and they didn’t get the chance that other people do, right? So, I always like to say, life is short—and the days are long, and the years are short. But, overall, that’s what that is about, is balance in your life. And by keeping the strategy simple, we want you to put money away. And we can get into another day about compound interest because that’s why your long-term bucket—you can do a little all the time because Albert Einstein talked about compound interest is the eighth wonder of the world. Well, you’d be amazed how fast you’ll accumulate money if you start early. But if you put too much away in your retirement plan, Lee, and this is something for younger people to think about. 401(k)s and IRAs today are designed to—money is not to be taken out ‘til after fifty-nine and a half. And with life expectancy so long today, it looks like we’re going to be pushing retirement back out past 70 from 65 today. And it’ll continue as life expectancy increases. You might be putting your money away today and you might not access it for up to 50 years. So, let me ask you, Lee, you think maybe every now and then you’d like to go out on a vacation, right? Get out of town?

Lee: Yeah, yeah. Yeah, I think I would.

Ed: And that’s the strategy behind that is, is that by having balance—everything in moderation, including moderation. Our industry is a self-serving industry. I probably shouldn’t have said that out loud. They want you to put all that money away because they make little bits of fees off of you. Well, the fact is, again, balance is probably you’ll live a longer, happier life, God willing.

Bob: Ed, this is Bob Martin again. Real quickly, is part of this premised on the concern that maybe we’re not getting enough of this information out there? So, people aren’t making the kind of decisions and they’re not really thinking about short-term buckets, long-term buckets, and lifestyle buckets? They’re just kind of plodding through their life, and they end up at 65 or 70 and they haven’t made the kind of plans that they need to make?

Ed: Yeah, Bob, and 60—I believe the number is—well, I know it’s over 60% of Americans today can’t afford a $1,000 emergency and over 64% of Americans save zero for retirement. So probably something we weren’t going to get in today, but Social Security: It will always be there for the younger folk because it is a pay-as-you-go system. Congress knows this. They won’t touch it. They might reduce it, but they’re not going to get rid of it. It’s built in the fabric of the United States retirement system.

So, you’re correct. The information’s not out there, and that’s why starting with something simple as three buckets—nobody needs a complex financial plan if you’ve got one job and a house and two kids, that’s not complex financial.

Bob: You also talk about the whole concept of spenders and savers and how do you handle bills and savings. Are you proponent of putting your bills in your savings and having automatic withdrawals or automatic deposits of those, so you don’t even see it, for lack of a better way of putting it?

Ed: Oh, absolutely, Bob. There’s only two kinds of people on this earth: There’s spenders and there’s savers. And it’s really important to know which one you are. I was raised in a family with a brother and a twin sister, and we were all taught about money the same. We all were raised exactly the same, nothing different. And I’ve got two savers and I’m the spender for my siblings. And, so, I found out that if I didn’t have a 401(k) and didn’t take the money out first, I wouldn’t have anything for retirement—and that’s the same thing with your bills. It’s fascinating today, financially, that you can have everything drafted out of your checking account, and I think that’s the most important thing. But that’s the same thing on those three buckets in savings. Once you pay all your bills, you should be doing the same thing: automatic deferrals into your savings account, into your middle bucket, into your retirement plan.

Lee: Yeah, I think that’s a good point. Technology has made it a little bit easier to save. I, myself, am also a spender, so I can relate to what you’re talking about, where if something wasn’t happening automatically on the backend and I got to have my money, it would be gone. I wouldn’t have it saved up for retirement. So, I understand that completely.

Now, can you give us some examples of what types of things you might find in a short-term bucket, a mid-term bucket, and a long-term bucket? I know we kind of talked about it a little bit, but could you just give a couple of examples of what you might find in each of those, so that our listeners know what exactly we’re talking about here?

Ed: Yeah, it’s simply your short-term bucket is a necessity. That’s to cover that $1,000 emergency. That short-term bucket needs to be in a savings account—not home equity, not invested in the stock market, in a savings account. Unfortunately, today, you’re not going to earn a lot of interest, but it’s got to be there because when that emergency happens, it’s necessary. And actually, if you don’t have it started today, start with $5. You’d be amazed how quick it accumulates.

Your middle bucket is a not-a-necessary bucket. It’s a lifestyle bucket. It’s not for emergencies. That can be invested any way. That can be in the stock market. That could be in real estate. Because yeah, if you didn’t have it all there at the end, it’s not going to matter. Well, you’re probably not going to be able to go on a two-week vacation, but still might be able to go away for three days.

Your long-term bucket, that’s your 401(k), your IRA, your Roth, 401(k) IRA, things like that. Those need to be—today, you could expect in a market return—again, this is an index—you could expect compounding of 10% a year. Long term, every two out of three years, the stock market is up; the other one, it’s down. But by dollar cost averaging with that little bit every systematically monthly, you’re going to reach your retirement goal.

Bob: Now, so tell me, this is aside from the usual things we talk about, but where does the purchase of property—? Because all of us got to live someplace. We’re either going to pay rent or we’re going to buy property. Where does that fit into your three-bucket strategy? Is it considered a long-term bucket because you’re in—oh, go ahead. I’m sorry.

Ed: Great question. Great question. No, that’s your middle bucket. Because, again, retirement is necessary and the emergency fund. So, once you get that $1,000—for the short-term bucket, your goal should be three to six months of your expenses. And those are your fixed expenses: your rent, your mortgage, your car payment, your insurance. Those keep your plan in place. So, once you’ve established that short-term bucket, you’re done with that. That money now can plow into your middle bucket, and that’s that bucket to save money for a new home or a vacation. But I would think once—that you start that middle bucket, that would be your first big purchase would be a home. I think that’s important for someone to establish roots. The advantages of home ownership versus renting, we all don’t have that choice. But if you use a middle bucket and you’re consistent in putting away, you’ll be able to accumulate that down payment pretty fast.

Bob: And then add the contributions that are made to your mortgage and the equity that’s built in it, is that considered an asset in one of those three buckets? Is that the way that works, too?

Ed: Well, we try to leave that out of there at this time. That, if you do well and you buy a home when you’re young and you move on, usually, we move up. And as we move up in homes, our expenses increase. And then when people get closer to retirement, they might want to use that as an additional asset. So, I always think of it as a home—not as an investment, but a roof over your head, because that actually is necessary. But for most people, if they’ve planned well and done well throughout their life, they have an option and a great choice and they have choices they can make by downsizing. Most people own too much stuff. And sometimes to minimalize and move into a smaller home at retirement, with less to worry about, less upkeep, is a great part of your financial plan.

Bob: As the old guy on this call—I’m listening. I’m learning. These are the messages that I’m hearing, because we’re going to try to use your sessions to educate a group of people about the benefits and the values of just starting to put something aside now, even if it’s small—doing it. So, this is what I’m hearing you say. Currently, in the United States of America, most people have not planned for and have not set aside any money for their own retirement, other than expecting Social Security benefits. Is that a fair—is that a good assumption?

Ed: Yes, absolutely.

Bob: The second assumption that I’m hearing from you, from your conversation, is we should expect that Americans are going to be living longer. We should expect that you’re going to have substantial long-term stress on retirement because previous plans for retirement had you looking out and going into retirement at 62 to 65, maybe 66. That’s not the case now, right?

Ed: Yeah, we’re going to have to extend—the longer that we save, the more Social Security—the longer we work, the more our Social Security will be currently today. So, people are having to extend their work lives so that they’ll have something to live on in retirement.

Bob: Yeah. And, so, the other thing that I’m hearing you say is that we need to have a plan that’s going to supplement—that Social Security, unlike all these naysayers, is not going to go away. It’s just cannot be, it should not be, your primary source of your income in your retirement years.

Ed: Correct. Our United States retirement system—and people don’t realize we have one—it’s built around 401(k), Social Security, and your outside savings. Those three are what make up your retirement long-term bucket. Believe it or not, if you’ve ever looked at your paycheck, which—Lee, how many times do you look at your paystub? Probably, you might never have looked at it, right? Right? Your—

Lee: Well, it’s my bank account [laughter].

Ed: You and your employer are both contributing to Social Security. So, I suggest to everyone they should go out to and register for their online Social Security account because they don’t send statements, unless you’re close to retirement, anymore. Government saves $3 billion a year. Go look at that. And Bob, particularly, you need to go look at that. And you would be—if you think our political environment is contentious in the United States today, have someone touch Social Security. Because I’ve put in hundreds of thousands of dollars, between that and Medicare, already by my age. I want my money. I’ve put into that system. And so that’s again, that’s part of our fabric of the United States. But unfortunately—think—over 60% of Americans only have Social Security as their only income benefit. So that means our economy would implode if the government pulled the plug on Social Security, factually.

Bob: Yeah. So, the good news is they can’t afford to pull the plug because they have so many people dependent on it. The bad news is we have so many people dependent on it. I mean—on that, particular—

Ed: Correct.

Bob: So, we could go on and on and on and on. But I think that the message that I’m hearing has to do with, we’ve got to start saving even if it’s minimal. We got to start realizing we’re going to have significant long-term stress on our retirement. We have to do something with that. We should not be one of those people that says, “I’m never going to get Social Security.” You’re going to get Social Security, but it should only be one of your legs of your retirement plan, right? Right, Ed?

Ed: Exactly, right, one of the three sources. So, again, 401(k), IRA, Social Security, and then your outside savings. Just following up like what you said, Bob, is that it’s never too late to get started—and just start with something small. You’d be amazed how you build up that habit and then it becomes part of your fabric. And really, thanks for having me. I just want to help people.

Bob: Well, thanks, Ed. We appreciate it. I think that as we continue with this series, which was actually an idea of Lee Doubleday here, because he’s on the other end. We’re on different ends of this whole retirement spectrum. And, so, we kind of see it—we see things differently. So, Ed, you’ve got two different guys balancing off this discussion, but we really appreciate it.

We hope that future episodes are going to not only help people like Lee, that are looking at, “How do I start saving? How I get that discipline? How do I get that nest egg going?” And then, maybe a few things for guys like me that are thinking—they’re seeing the end of the road and we know what we have and what we haven’t done. But maybe you can give us some nuggets of wisdom on that too.

Joining us today has been Ed Chairvolotti. He’s the president of 401karat. Ed is a good friend of the Imagine America Foundation and will be providing continuing resources in the personal finance and retirement area. Thank you, Ed, for joining us. Thank you, the audience, for covering out a little bit of your time and spending it with us today. On behalf of myself, Lee Doubleday, and the Imagine America Foundation, we hope you have a fantastic day. Goodbye.

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