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Maria Bruno: Hi. I’m Maria Bruno, head of U.S. Wealth Planning Research here at Vanguard.
Joel Dickson: And I’m Joel Dickson, global Head of Advice Methodology at Vanguard. Welcome to our podcast series, The Planner and the Geek, in which we’ll discuss topics that are important to individual investors.
Maria Bruno: And have some fun along the way.
Joel Dickson: Maria, welcome back.
Maria Bruno: Good to be here as always, Joel.
Joel Dickson: One of the things that we’ve talked about at various times is the difference between investing across different ages or for different goals and different generations and so forth. And we thought it would be great to actually talk to some investors about what gets termed the “millennial” generation. I think it’s a great opportunity to get a different perspective from folks that maybe aren’t necessarily investment professionals or wealth management professionals in terms of what are the considerations and approaches and thoughts and goals they take. So I think it’s going to be very interesting conversation to contrast how we often talk about it and what is thought about on a day-to-day basis.
Maria Bruno: And we had so many people who volunteered to be part of our podcast that we whittled it down to three people who are with us here today.
Joel Dickson: That’s right, exactly. But I do think we should start with what’s the definition of a millennial.
Maria Bruno: Yes, so that’s interesting. I googled that because everyone talks about millennials. So what exactly is a millennial?
Joel Dickson: You tell me. You googled it.
Maria Bruno: You might have your own opinion. So it’s anyone born between 1981 and 1996.
Joel Dickson: According to—
Maria Bruno: Apparently to trusted sources on the Internet. I did check a couple and there seems to be a general consensus that those are the year ranges—so 22 to 37. I think one of the things we’ll talk about is—are millennials really different or are they young investors? I was 22 to 37 at some point in my life. You were too.
Joel Dickson: I was too. The memory goes a little bit. Well, why don’t we get to know the panel a little bit, talk about some of the things that they’re thinking about, and place it in that context of the goals that we all may have at various stages of life.
Maria Bruno: Or what you want to learn more about as well when you think about personal finance.
Joel Dickson: Exactly.
Tamara: Sure. So my name is Tamara, and surprise—I work at Vanguard. I actually work on the Social Media team, and I’ve been at Vanguard for quite a while, so I feel very fortunate that I’ve learned a lot of great lessons while working here. But I didn’t always work here. I did start out at a nonprofit working on social service issues. And working there, there was no 401(k), there were limited benefits.
When I just graduated school, as far as finance goes, I think I knew how to use my debit card and that was about it. That’s the max of the knowledge that I had. So starting at Vanguard, I did learn a lot about saving and saving for retirement or different strategies to meet some of my savings goals. I think one of the biggest concerns that I still have many years out of college is student loans, and how can I work towards living in the present and saving for the future while managing such a huge amount of student loans. And that’s kind of a dark cloud over my investments right now. That’s the biggest thing that I’m thinking about— what’s my strategy to try to pay off those student loans as quickly as I can while still trying to save for the future? Maybe think about buying a house—how do I save for that down payment and balance those priorities?
Joel Dickson: In many ways, I guess, you see the student loans as being a barrier to other goals that you have and how to think about paying that off.
Tamara: Yes. I see a lot of friends my age starting to buy houses. And when I talk to them, maybe they do have student loans, or they did, or maybe they don’t have as many as I did. Thinking about how much I’ve already paid kind of astounds me. And I think that’s awesome. I’ve accomplished some sort of savings goal in that I’ve been able to start paying off a chunk of those student loans, but I know I still have a long ways to go, unfortunately.
Maria Bruno: So, Tamara, not to get too personal, but do you rent currently?
Tamara: I do rent, yes.
Maria Bruno: So do you ever think about this whole rent versus buy decision, because you are investing in housing today through your rent. Is it the mortgage and the actual down payment of the home?
Tamara: I think it’s the down payment that’s facing me and thinking about that money I’m putting monthly towards paying off my student loans. And I am very fortunate—I’ve been able to keep up with that over the last however many years, but that could’ve gone towards a down payment for a house. So that’s why I’m currently renting. I also recently moved from the city, so trying to learn a new area where I want to live anyway. But depending on where I want to stay, maybe I do want to buy, but if a lot of those savings are going towards those loans, how do I save for that down payment as well?
Joel Dickson: I already see the pattern. You move from the city to the suburbs—the minivan isn’t that far behind then you know.
Tamara: No, no, no.
Maria Bruno: They’re SUVs now. Not necessarily minivans.
Joel Dickson: Oh, we can get a whole minivan/SUV discussion going on.
Tamara: Yes, millennials drive SUVs. Not ready for—
Maria Bruno: That’s why we’ll get you into that market.
Joel Dickson: That’s exactly right.
Maria Bruno: All right, Tamara, thanks. Bridget, you’re here with us as well. Why don’t you talk a little bit about yourself, please?
Bridget: I recently graduated from college two years ago, and I’m a paramedic and work in the emergency room in a trauma center. It’s a Level 1 Trauma Center in Center City [Philadelphia]. And so right now I’m able to save, but I also just applied to graduate school—physician assistant programs—all locally. I currently live at home, so I’m able to save and have minimal debt right now.
Maria Bruno: So it’s a full-time program?
Bridget: Yes, it’s full time for 24 to 27 months depending on where I get in and the different details of the programs.
Joel Dickson: Are you going to be starting that soon?
Bridget: I applied this past June, the cycle starts, and I would be interviewing probably to around the New Year. And, hopefully, I get accepted and I would start somewhere between May and August.
Joel Dickson: So, actually, it’s relatively soon.
Bridget: Yes, it is.
Joel Dickson: Very interesting. Grace, the third person here joining us today, why don’t you tell us a little bit about where you are?
Grace: I am a freelance graphic designer. Right out of college I moved to LA, which is an expensive city. I’ve been freelancing for the past four years, and after a while I just got tired of having the student loans, having an expensive rent bill, and all the other things I had to deal with in relation to also pursuing my passion and my fulfillment. I actually recently moved back to my parents’ house so that I could take care of my student loans, and I have just finished paying them off about three months ago.
Joel Dickson: Oh, nice.
Maria Bruno: Nice.
Grace: Yes. So that’s been a huge weight.
Maria Bruno: So that feels good.
Tamara: Tell me what it feels like.
Grace: You know it’s anticlimactic because once you get there, you’re like, “Yes! Now what’s next?” But when I was living in LA, I freelanced, so the paychecks weren’t always steady. You’re always hustling with the freelance business, but I’m also starting another business. And as someone who’s just starting out, you’re just figuring it out because there aren’t any rules necessarily and with savings and all of that, I feel like I am investing my time for the rewards later. So instead of trading my time for money now, I’m investing my time into making a more lasting financial reward.
Joel Dickson: And that’s one of the things that I think we would love to highlight and talk about a little bit more—we hear these concepts of “I need to save” or “I need to invest for the future.” But I think oftentimes, that bombardment ends up being, well, saving means I’m putting dollars in an account that is expected to grow over time, or whatever it may be. But these terms can mean very different things. Savings—paying down debt is saving, right? Or, Grace, you mentioned moving back home. Well, you just cut your spending a lot. That’s another form of saving, because all else equal now, there are more resources whether it being able to devote to your business, being able to devote longer term, and so forth. But I think sometimes people don’t feel that, “I’m saving” or “I’m investing.” Bridget, when I think about you going back to school, that’s an investment. Think about investing for future return on that investment. A lot of times, though, we bucket these things completely separately. But, all of these things that we’ve been talking about help build ability to save financially or with dollars down the road with the decisions that are made today.
Grace: Yes, and I definitely think that me, personally, I’m in a place of looking for long-term stability and ownership. When I was renting, I was also leasing a car, and it felt like I was just giving away what I was making and not necessarily getting a return. Right now, I am thinking about the house, and I am thinking about what would be a much more long-lasting stable foundation for my future.
Maria Bruno: So the one thing, Joel, that I heard consistently—with all three of our guests—is student loans. We talk a little bit around what the differences are with millennials, and we hear that this is the big elephant in the room—paying down student loans. So that seems to be the big one. The other thing is—because I work with millennials, I write about personal finance—I also spend a lot of time with them and try to think through, okay, how is it different. The other thing is, and I wanted to get your thoughts on this, too, is how you approach investing. So, for instance, I read a lot in here in terms of the global financial crisis and the stock market crash and how that has impacted how you approach investing. Maybe it is, maybe it isn’t. Or how you think about investing in terms of a time horizon, because you all have different goals, and how you’re investing is different because of those goals. So how do you go about thinking of that? Tamara, I’m looking at you, but you live and breathe this with us, so a lot of what you do endorses the investing principle. So I might talk a little bit more with Bridget and Grace in terms of how you think about investing and how you got there. Is it through experiences through family members, for instance, or your peer group, or is it through reading, things like that?
Bridget: For me, I have two family members that work here, so I’m forced to hear about it sometimes, which is okay.
Joel Dickson: I love that framing.
Bridget: What I do know is through them. I wouldn’t even contribute to my 401(k) if I didn’t have two family members that worked here.
Maria Bruno: Did you proactively talk about this with them?
Bridget: Yes. When I got the job out of college I asked them, “What should I do with this?” They both told me the same answer. And so, I think for me, there’s some sort of fear, too, about the future and how I don’t have any debt per se right now, but how I’m going to accrue it—and, yes, I’m going into a field that’s somewhat recession proof. I think there’s somewhat of a fear, so I’m thinking more about what I’m going to be facing rather than what I can do long term. It’s more step by step. And I think that I could be thinking more big picture than I am.
Joel Dickson: I was struck by a couple things when we were introducing everyone. Retirement wasn’t really anything that came out. There was a little bit about, yes, I’m kind of saving—Bridget, as you talk about the 401(k)—but I just know I need to save. I don’t know what the future may be and what the goals are and so forth. So I think so often, and I know at Vanguard, we talk, “Oh, you’ve got to save for retirement.” Well, my guess is—please correct me if I’m wrong—that’s not a concern at this point. It’s not even a thought. It’s more, “How do I live in the day to day, but still maybe try to think about protecting my future in certain ways, or being in the moment versus 40 years from now—how am I thinking about that differently?”
Maria Bruno: I have a couple of thoughts. We’ve got two of our three guests who have 401(k) plans, probably with a company match on both fronts. So you’re doing it inherently, and it’s setting you up for financial success. Grace on the other hand—
Grace: I don’t.
Maria Bruno: Right. You’re going to have to figure out, “What options do I have?” Because you do have some tax-efficient account options that you can set up and then you have to proactively do that. So there’s more legwork on your part in terms of saving for retirement, where it’s much more organic with Tamara and Bridget, I would think, in terms of the employer plan.
Joel Dickson: I don’t know. I’d be interested in Grace’s perspective on this. I don’t even know that she necessarily needs to save for retirement in that conventional way—because in terms of building the business—one of the greatest components of being able to save for retirement is the income that you’re generating while you’re working.
Grace: It’s honestly not a concern of mine right now.
Joel Dickson: Yes.
Grace: I’m not even thinking about that because I’m so focused on just trying to build what I have in front of me, and what I’m making, I’m putting it back into the business. And I feel like that will reap future rewards, but it’s more about—I don’t even have health care. It’s all back into investing in my passion.
Maria Bruno: Yes, I get that and that makes sense. There will be a point though, Grace—as you build your business—that these are the things you would need to think through. You may have to do this more proactively than those of us that have an employer-sponsored plan, where a lot of that legwork is already done and it’s opting out, not opting in. We’ve talked about this in other podcasts.
But the other thing I hear is that it’s really not around saving for retirement, but financial independence.
Maria Bruno: And I think as we go through the table here, that’s what we’re hearing in terms of managing these different goals. Financial independence seems to resonate much more with younger investors than saving for retirement or retirement replacement ratios or things like that.
Joel Dickson: All those technical concepts that are encased with gobbledygoop—
Maria Bruno: Mean nothing, right?
Grace: The other thing, as a freelancer and consultant, is the taxes that you have to think about that you wouldn’t think about if you were working at a company. I was full time before and when tax season came around, I thought, “They’re taking so much from me.” But it’s because when you get your paycheck, they’re not taking taxes out.
Joel Dickson: Yes, there’s a whole lagging element about that. And what looks like double Social Security to you—even though when you were working full time, the employer in essence contributes half of the Social Security and then you get half of the Social Security out of your paycheck—even though that might affect your total wage, economists argue about this all the time, when you actually see it and you’re doing the taxes—12.4% of that—
Grace: Yes, there’s this whole other financial component when you go independent. That surprised me; that’s what I’m trying to say.
Maria Bruno: Yes, it probably is like, oh, wow!
Joel Dickson: That’s exactly right.
Maria Bruno: Grace, Joel is the geek if you haven’t figured that one out. So you can talk to him after the podcast a little bit more. He’ll help you with your tax return.
Tamara: Joel, to your point, though, if I could say one thing about thinking about retirement, I know even for myself—I work at Vanguard, I live and breathe it every day—but it still seems so far away. And I think a lot of people my age kind of think of it as so far away. For me, I was one of the first graduating classes after the recession, and I know for a lot of my friends, it took them years to get a job. So they’re even a little further behind than maybe prior generations were. But I think one of the things that I try to keep in perspective is I’m at the age now where a lot of friends are buying houses, they’re starting to have kids. I think about when we were in high school and you think that’s so far away. I’m never going to—no, we’ll never be parents. Oh, we’ll never be that age. Or you watch a show when you’re younger and you think those people seem so old. Now I think, “I’m older than how old they were on that show.” And that’s kind of how I try to think about retirement: I know it’s going to be here faster than I think it will be, and so it is important to think about. But at the same time, just think millennials are those younger investors but there are certain challenges maybe a few generations haven’t seen. Or you haven’t seen those challenges maybe for a couple generations, such as graduating right when there was a recession. I know it’s happened before, but I think that’s maybe one of the barriers that do make millennials a little bit different.
Joel Dickson: I think that’s true in many different stages of life. When you’re young, you’re thinking about this set of goals. When I first had kids, I was thinking about a different set of goals—I want to help them with their college education, living day to day with a whole series of new expenses, and so forth with kids. So, yes, it’s always like you can put it off, but if you do, that in many ways becomes even more problematic in terms of how you catch up. And that’s why a lot of times just doing it is important. How you do it may not necessarily be as important, Bridget, as just putting stuff away. And my understanding, too, was that the advice that you got from the family was to put it in a pretty simple target-date fund, automatic investment and don’t worry about it. Just let it grow, right?
Bridget: Yes. And then I also tried to save because I know that I’m going to have to take out loans for my education, but I also have to live. And I think that it would be what I can do in this time while I have a full-time job before I go back to graduate school, which some people don’t take time in between, I can use it to my advantage to offset some of that debt. But is that the best thing to do with that money or should I be putting it towards tuition or whatever it may be?
Joel Dickson: Yes, debt management. I actually did want to get your perspective on it because one way millennials may be different than say previous generations of investors are with things like student debt. There is a perception, and I think a reality, around levels of student debt have been higher than historically. And does that then lead to different life choices because of it? And, Tamara, you mentioned sometimes it feels like this dark cloud. And you mentioned the house piece and how you trade that off. Do you think you have put off other things because of the student debt that you have?
Tamara: I was just recently thinking about my student debt. I try to budget on a monthly basis and figure out maybe where I’m excessively spending that I don’t have to. And when I look at the number that I’m paying each month for my student debt, if I multiply that monthly number times 12 times however many years, there’s my down payment for a house right there. You mentioned before that paying off a student loan is saving. That’s an accomplishment in and of itself that you’re able to pay that off. Grace, you paid off your loans already, so I’m going to be coming to you for advice.
I think the house piece is a big portion of it. Or that’s money that could go towards my future—towards retirement or a future education if I have kids one day. That could be their education.
Joel Dickson: But at the same time, the student loan or the student debt also enabled your education which, again, we get back to that being an investment in itself too. And so in many ways, it’s the payoff of that investment.
Grace: I did feel when I had student loans, on top of having to pay rent and all the other bills, that it was a dark cloud for sure, and it was obstructing me. This is not what I want to do. I want to start my passion project or whatever. And I knew from reading books that I had to get rid of the debt. And if it took moving back to my parents’ house, then that’s what it took.
Joel Dickson: Yes, and that’s really interesting because it gets to those tradeoffs—spending, saving, how do you go about doing it? Some people maintain and just get into a cycle of debt that becomes a burden over time. And we hear that even from fairly wealthy people.
Maria Bruno: So let’s talk about that for a little bit. We’re talking a lot about student debt. And I agree with you, Tamara, in terms of what you had talked about earlier, when I was in my 20s it was the same things. Retirement seemed so far away, but I knew that I had to put money into my 401(k). I look back now, and I probably could’ve stretched myself more when I was younger. But hindsight is always 20/20 when it comes to investing. Student debt is a big one. I wanted to get your thoughts around consumer debt, because that’s the other thing we talk about in terms of lifestyle challenges. So you’ve got housing and things like that, but what are your views—given that you have student debt—around consumer debt?
Bridget: First I want to ask, what is consumer debt?
Maria Bruno: Thank you; that’s a good one. I’m glad you asked that because not all debt from a tax standpoint, or even from an investing standpoint, is created equally. If you think about a mortgage, for instance, or student loans, you’re making an investment either in your earnings potential. You’re going through that right now, Bridget, in terms of your decision to go back to school. You’ll be faced with some decisions how to pay that debt in order to increase your earnings potential. Home ownership is the same way. With a mortgage you’re building home equity. Consumer debt are the credit card bills and those types of things where—
Joel Dickson: Yes, you really want that big screen TV. Incur credit card debt and then interest payment on top of that.
Maria Bruno: Of course, you go right to the big screen TV, Joel.
Joel Dickson: Well, our personalities are coming out, right? I need the big screen TV.
Maria Bruno: So we all have credit cards, right? The question is, are you more apt to think about purchases to pay that credit card off monthly, for instance, or more comfortable carrying consumer debt? And you don’t have to get too personal with this—I was just curious. I’m debt averse. Joel and I talk about this.
Bridget: Yes. I’m extremely debt averse, and I think that’s because of student loans. I don’t want another amount that I have to pay toward every single month. I just want it to go away at the end of the month. So I would think of credit card debt as something I want to avoid at all costs.
Tamara: Something I’d like to avoid, but I’m still working on it. I don’t have a huge amount of consumer debt, but when I think about paying it off every month, I’d like to be more organized than I think I am. But I know it can be tough. I have a lot of friends who rely on that credit card to fill the gap often. Maybe that’s between paychecks or between whatever they might be depending on. And I’ve heard from a couple friends that they’ve tapped into maybe a 401(k) or some of their savings to pay off some of that debt. And you think about that—it’s a little scary that that’s what some of the folks our age are trying to do just to ease that stress. I don’t know where my risk aversion would be compared to Bridget’s, but I try to be mindful—definitely— of it because that’s just another debt that you have looming over you. But I know for a lot of people sometimes that can be unavoidable.
Joel Dickson: Grace, I’d be interested in your perspective because—and I’m going to forget where I saw this statistic—the primary financing source for small businesses is actually personal credit card debt.
Grace: Yes. I actually accrued a lot of consumer debt while I was still living in LA. And that was a point for me—I have to start paying all this off and down. And so, since paying off my student loans, I’ve been really mindful of keeping the debt down. However, I still use my credit cards to pay up front for an upcoming product just to get it started, and then make back the money from selling the thing.
Joel Dickson: Yes, cash flow management. I have a good friend who’s my age who has a health-related business consulting for consumers. He actually has quite a lot of credit card debt even still at my age. Part of his strategy is he rolls it over every year and pays the 3% transfer fee, but he gets 12 months no interest. He is constantly doing that and trying to make the decision about, when you have a finite set of resources, how you think about paying—he has four kids—for kids’ expenses and the regular day-to-day life piece of it versus the business expenses piece of it. He’s constantly making the tradeoff—I’m still at the position where I can roll it over, 0% interest rate, 3% for the convenience of doing that, how to trade that off. And it’s just interesting to think about those different dimensions.
Grace: I think also there is good debt and bad debt. I was reading Rich Dad Poor Dad and watching one of his videos, and I think there’s this stigma around debt that it’s bad and you’re a bad person, it’s shameful. I did feel a lot of guilt when I had debt, but I think it’s also the perspective of is it building your business or is it helping you? Are you making more than what you paid for the debt? It’s just the perspective that money is an object and not who you are. And I think a lot of us personalize it because of what we’re told when we’re younger, but also in comparison of what you have to others. I look at my future and I think, “Oh, I want that house.” But do I want that house because everyone else is buying that house? But is that the right lifestyle for me?
Tamara: Yes. I think that is maybe one thing that is different about millennials—now everything is public. You see everything. Everyone’s posting pictures all the time of these happy houses or these new cars, of all these things. I think even back to high school—thank goodness there wasn’t social media like it is now when I was in high school and all those pictures of crazy hairdos.
Joel Dickson: I won’t tell you what was around when I was in high school.
Tamara: I think you see all these things that are happening around you, and that can drive you to make some of the financial decisions that you do or don’t make, because you’re seeing some of the things that your peers are doing. And you never know how they’re paying for it too. That’s what someone recently said to me, “You don’t know how that person paid for that car. You don’t know how they paid for that house. You shouldn’t feel bad that you don’t have that because you don’t know what their personal situation is. And if it’s not right for you now, then you’re doing what you should be doing right now.” So I think that’s maybe one thing that differs with millennials is that everything’s public. Everything’s out there. We can see a lot of it.
Grace: Yes. My brother the other day said, “Oh, are you going to get the new iPhone?” I said, “I don’t need a new iPhone.” But that’s the culture. There’s a new iPhone it feels like every six months or something.
Tamara: Yes, trying to keep up.
Joel Dickson: What I would say, because I saw this when I was younger, my friends were buying houses and so forth and often a number of the rooms didn’t have any furniture in them.
Tamara: The one room where they hosted had furniture.
Joel Dickson: Exactly. The concept, Tamara, as you were saying, of everyone has a house. It’s kind of what we are programmed in some ways to do. The sort of very traditional images and approaches of you go to school, you get an education, you get married, you get a house, you get kids, you get a good job—whatever it might be—is, I think, engrained in some ways. And I don’t mean that from a positive standpoint of expectations that get put from a cultural standpoint. But, you’re right, you don’t know how people are actually doing that along the way. And is it the house because they’ve been programmed, “Hey, now’s the time when I buy a house.”
Maria Bruno: It is funny, because I think I’ve read that young investors are shying away from buying homes—that home ownership is occurring later. Marriages are happening later, I think, too. But I often go back to why do you want to buy a house? So, Tamara, why do you want to buy a house?
Tamara: I think part of it is investing in myself and not just paying someone else. But then I also think about renting, and if the fridge breaks, I don’t have to worry about it. If the air conditioner breaks, I don’t have to worry about it. So I do go back and forth—if I own my own house, then I’m not paying someone else. If I ever want to move or I want to rent it, it could be additional income. If I want a roommate, then that can help subsidize some of the cost. But then I’d have to worry about all those headaches of home ownership as well. So I do go back and forth.
Maria Bruno: Yes. I ask because I went through this as well when I bought my first home, in terms of, “Why do I want to do this?” And there was this almost rite of passage of having your first home and owning a piece of ground. But with that comes a lot of work. I find it very rewarding to have my own home, but it was a big adjustment, and not everybody is ready for that because when you rent, there are a lot of things that you don’t necessarily have to deal with or things that you learn as you go along. So I always ask everybody, “Why do you want to buy the house?” Because there’s nothing wrong with renting. There isn’t a bad stigma with renting because you’re going to pay for this either way. Just how do you think about home ownership? How long do you intend to live in the home and whether it makes sense financially to rent versus buy. So it’s emotional and I think it’s financial.
Tamara: Yes. Well, it’s funny you say that, because I recently moved from the city to the suburbs a couple months ago. Don’t judge me.
Maria Bruno: Oh, I’m a suburbanite through and through; I don’t judge.
Tamara: Recently moved.
Maria Bruno: People judge me for not ever living in the city.
Tamara: Yes. But I recently moved to be closer to work, to take less stress for the commute, to be closer to—I’m in grad school now—so to be closer to grad school. But the number one question, the first question I got was, “Well, why didn’t you buy something? You’re renting? Why are you renting out here? Why didn’t you buy something?” And I think that’s interesting that that’s everyone’s first reaction, “Why didn’t you buy a house?” Well, I don’t know if I want to stay here. I don’t know where I want to live. I don’t know if I want to deal with home ownership right now. Plus, when you’re living in the city, you always rent, and that was my mindset for so many years—that’s not the mindset for everyone to just immediately buy a home. So it’s a good point.
Joel Dickson: One of the other differences I’d like to highlight a little bit as we were talking about different approaches—Tamara, you just said you’re in graduate school now. So you’re, obviously, doing that part time while also working full time?
Joel Dickson: And that, in many ways, is a way to pay for that schooling. Vanguard has a good tuition reimbursement approach but also that decision to do part time and so forth.
Bridget, you had mentioned you’re going to be going full time to graduate school, which leads to a whole different set of considerations and thought process.
Bridget: It does, yes. With the programs I’m finding it’s pretty much unanimous that you go full time for 2 years or up to 27 months, whatever it may be. So my mindset is that there’s no option there to work. And so I have to think about how I’m going to pay for that afterward, because there’s no way I could pay for it during it with my own income.
Joel Dickson: Not only paying for school, but as you said a little bit earlier, the daily living expenses that you would still have while going to school.
Maria Bruno: You still need to eat.
Bridget: Yes. And am I going to live at home or am I going to want my own space since it’s going to be a pretty demanding program? I think it is worth it to have your own space and be successful in school and maybe accrue some debt because of that. Or should I use what I saved to pay for that? Those kinds of decisions.
Maria Bruno: So knowing that this is on the horizon, have you made any changes to your financial decision-making now?
Bridget: Oh, yes.
Maria Bruno: For instance, you’re saving in your 401(k). Have you thought about scaling that back and investing more in either a nonretirement account or other multitasking-type accounts that can meet both retirement and emergency reserves, like a Roth IRA for instance? Have you thought about saving differently, and how so?
Bridget: I have thought about it, but there’s no action there. Emergency—yes. I save a big chunk every paycheck, because I know that I’m probably going to need it.
Maria Bruno: And we say emergency so that’s in a cash account, for instance, of some sort?
Maria Bruno: Some liquidity type account.
Bridget: A savings account.
Maria Bruno: Okay, great.
Bridget: But I would definitely be open to the idea if there was—you mentioned a Roth IRA or something like that, if that was smart, knowing that I wouldn’t be able to contribute to it during my years of grad school. Or are you eligible if you can’t do it? I don’t know any of that.
Joel Dickson: I think it’s an interesting financial planning issue because, on the one hand, one of the nice things about Roth IRAs or education savings, like 529 plans, is that you don’t have a penalty or taxes when you’re withdrawing under certain conditions.
Bridget: As opposed to a 401(k), correct?
Joel Dickson: As opposed to the 401(k). And if you had to take money out of the 401(k) before you’re 59½, there could be a penalty in addition to the taxes depending on what it’s used for. But what is interesting from a financial planning perspective is, if you don’t have any earned income the penalty is basically zero. Right? So you’d have to pay a 10% penalty, but if you don’t have any tax due because of not having income that would be taxable, then that may be a good way to take that out as well. So you’ve got the up-front tax deduction in contributing to the 401(k). It would be interesting just to model, for example, or think about what does the income profile look like while you’re at school and what does that mean. And it can get even more complicated because, as you said, you’re probably starting in May or June.
Bridget: Yes, so that’s half the year.
Joel Dickson: So half a year you have income and half you don’t—so different types of strategies. But it’s different than, Tamara, how you might think about if you had to take out some of the resources and think about paying for school. Full-time employment and so forth—a very different tax situation where a penalty paying tax and a penalty may really decrease the value of that savings that you had done to that point in time.
Tamara: Definitely. When I went back to school, I actually opened up a 529 plan for myself. A lot of people think that 529 college savings plans are for kids, but anyone can open up an account. So I tried to do that as a way to help minimize some of those costs. It’s a small amount that I’m saving in the plan each month, so it’s not huge, and I know it’s short-term—grad school isn’t 18 years away. It’s right now. It’s a couple years, but every little bit helps. And so I kind of think about it as if I have a book cost that I wasn’t expecting or there’s some sort of program cost, I can maybe tap into that to help.
Joel Dickson: Well, at least in Pennsylvania, you can get a state tax deduction for that 529 plan contribution and no tax on the way out.
Tamara: But I did that because I was weighing my options. Do I try to use my Roth to help pay for some of the additional costs for school? Do I use an individual savings account? What are some of the pros and cons? I don’t know if I’m jumping the gun here, but Joel, Maria, it sounds like we all have a lot of competing priorities when it comes to saving and spending. What account do I take some of this money from? What’s going to be the most impactful maybe from a negative perspective? Or are there any thoughts of what not to do when we’re thinking about paying off some of these costs or paying for any business costs or school?
Maria Bruno: Yes. I just jump to what people often think in that it’s sometimes all or nothing and it’s not. And Joel had talked about this earlier, it being a series of tradeoffs. So, yes, if you save 100% for retirement, you’re not going to be able to meet these other goals or invest in yourself or your company. So I think account diversification is good. Having different types of accounts, retirement/nonretirement, so that you then have the flexibility. And that can include emergency savings where you might need to tap into things sooner rather than later. So I think that’s a prudent approach. I do think you need to think about it short term and then long term. So I’m looking at Bridget here who knows that going back to school is on the horizon. The thing you would need to think through is are you going to finance it 100% or are you going to self-finance part of that? You may not know that yet, or you may, and you may be able to make some decisions in the near term to help accommodate that.
Maria Bruno: So, if you know you’re going to self-fund some of this, then maybe it is okay to peel back a little bit on the 401(k) and invest in this shorter-term goal so that you feel more comfortable around the debt that you’re undertaking with the loans. I’ll put the caveat, though, is you always want to make sure you’re contributing at least to the company match. If not, you’re leaving money on the table.
Joel Dickson: Yes, free money is always good.
Maria Bruno: Correct, Joel.
Joel Dickson: That would be the title for the podcast—free money is always good.
Grace: Everyone will listen.
Maria Bruno: So I think that’s good and you have a couple options. We talk about a Roth IRA. As long as you have earned income, you can contribute to an IRA. With the Roth IRA you can tap into contributions income tax and penalty tax free, so there’s a level of liquidity there as well. Once you’re in school, though, and you don’t have earned income, you wouldn’t be able to contribute to that. So that’s something you might want to think about this year or next year before you start school.
Joel Dickson: Yes. I go back to, “Do it is more important than how you do it.” But just thinking about, “I know I’m going to have this set of things that I need to compete against,” even just starting on each of those. Whether it’s a Roth IRA or a taxable account in some ways is secondary.
Grace, though, I’m thinking there are different priorities and how we might think about it. My guess, Grace, is that you probably look and see that your income could fluctuate, be very uncertain. There might be periods of time—
Maria Bruno: Take the “could” out of that. It will.
Joel Dickson: It will be. Exactly.
Maria Bruno: It will and that’s okay. You just have to be comfortable planning for that.
Joel Dickson: Absolutely. Yes, but it does get to a different planning piece, which is you probably need to think about much more this kind of emergency savings given that I may not have income sources for some period of time, right? Whereas Bridget and Tamara with the full-time job, there’s this income source piece that you can kind of rely on for the sort of basic daily living expense piece of it. Grace, you’re in a different boat from that standpoint, right?
Grace: Yes. It definitely fluctuates and you just have to get comfortable with the swings. It’s kind of figuring it out as you go because, no, I don’t necessarily have a plan because it changes so much. But it’s almost just trusting that it’ll work out. I’m an optimist.
Bridget: You have to be.
Maria Bruno: Yes, you have to be with all things in life.
Joel Dickson: Actually, I think there’ve been some studies that optimists have a longer life expectancy than pessimists anyway. So that’s a very good thing.
Maria Bruno: But I think what you’ll find, though, Grace, is that once you are situated and you get this cash flow, you’re going to want to think about, for instance, if it’s seasonal. I look at contractors—their income is seasonal, so they have to plan for those months when they’re not going to necessarily be working. So I think your mindset will shift and you’ll want to think more in terms of, if you see that your income ebbs and flows, make sure you’re prepared for those periods where the income may not be as steady. So how you think about it is going to probably be more short term and then also long term on top of that. You think about it a little bit more proactively.
Joel Dickson: Yes, that’s where I was going with it too. The prioritization for each of you is different based on the situation that you have of which accounts or what liabilities or risks there might be. I’m just thinking from Grace’s standpoint, you probably want to make sure you have this emergency fund that can deal with the basic expenses when you don’t have them or have liquidity to be able to pull it out of your business in those periods.
Grace: Yes. I definitely have a separate account for my business and have a savings account that I can pull from. Am I mindful of that? Much more so than I was before. But in terms of all the other things you’re talking about with the Roth IRA, it’s almost as if I’m not quite sure where to start because I’m figuring it out as I go. So it doesn’t seem like a priority right now, because I’m more about building the savings account if anything.
Joel Dickson: Yes. One thing that you might consider is building that savings account within a Roth IRA, because you kind of have this long-term perspective. But actually with the Roth IRA, you have the ability, as Maria was mentioning, to pull out the contributions basically at any time if you need them.
Bridget: So like you were saying before, a Roth IRA would be considered low risk, correct?
Joel Dickson: A Roth IRA is an account. And then there are investments that would go and fund the account. So you could have risky or not as risky investments in the Roth IRA. But the Roth IRA is this tax-advantaged structure where, if you contribute dollars, even though you don’t get a tax deduction for it, you can get— Again, there’s certain conditions, but basically you’d be able to pull out any contributions that you make tax-free regardless of what the investments are in that account. Now those investments, risky or safer, may allow the account value to grow more or vary more over time.
But, yes, it’s that difference between different types of accounts and different types of investments.
Tamara: Makes sense.
Maria Bruno: And Joel and I have these discussions a lot around—so Roth IRAs have a liquidity feature. So, as I’d mentioned earlier, you can access the contributions income tax free, penalty free, so there’s a unique feature—which is good. But they are retirement accounts and I do think that everyone, all of us at this table, should have that emergency savings, that rainy day fund. A guideline is to have three to six months’ worth of living expenses in emergency reserves. Well, given where you are in your journeys, you may not be able to have that. So where you think about having some emergency reserves and potentially something like this account that you can tap may be multifaceted; it could help you save for retirement, yet there’s a liquidity feature there. But I don’t know, it does not—Joel’s laughing here—the Roth IRA does not replace the emergency savings reserve.
Joel Dickson: See, and this is where we’ll get into debates on 101 versus 401.
Maria Bruno: I’m the financial planner.
Joel Dickson: And this is because—this time I’ll do it—but Maria’s gotten hate mail on blog posts.
Maria Bruno: Hate mail, no!
Joel Dickson: Well, yes. But on blog posts. “Oh, why are you suggesting tapping your retirement account to meet a short-term need?” But, again, what’s the best way to build the savings and the wealth over time? And so, again, the 101 version is just save—it doesn’t matter where. The 401 version might be, I might have an extra $500 in after-tax money if I did it this way versus that way. But the fact of the matter is unless you save, you don’t even have that option to have the 500 extra dollars doing A or B.
Tamara: I think that’s a good point. I try to take myself back to the time before I worked at Vanguard and I kind of knew a little bit about this. And I never studied business, didn’t take finance classes, or anything like that. I studied communications and criminal justice. And none of my friends knew about saving. And it can be such an overwhelming topic sometimes—just how do you get started? What’s your first step to take? So I think just starting to save—whatever you can do, whatever you can think about, whatever makes sense—is a great way to think about that, because it can be so scary if you don’t know anything about it.
Joel Dickson: Just the whole concept as we’ve talked about, just the fact that all three of you are worried about and consider how much debt do I have, how does it meet whatever goals that I’m going to have, what’s the purpose of the debt, the Rich Dad Poor Dad approach or reference, those types of things—just immediately you’re in a better spot for thinking about the ability to meet that. And, again, how you do it then is somewhat secondary. Though I think we get bogged down in the details sometimes.
Maria Bruno: But I want to jump in, though, before we wrap up in terms of —we’re talking about savings. And I think, to be clear, saving is different than investing.
Joel Dickson: Yes.
Maria Bruno: Saving is really more around thinking about a short-term goal and make sure you are saving enough for that. Or even how much do I need to save to get to a longer-term goal? Maybe it’s a house purchase or some other intermediate-term type goal. Investing is—I’m investing in a goal; how do I allocate my monies? How do I save to different type of accounts and things like that? So there’s a difference between saving and investing. And I would also put that investing in yourselves is in that latter bucket as well. So, if you are incurring debt to go back to graduate school, for instance, or putting money into your company, you’re making that investment either in your earnings potential or in your company—which then is your financial wellness going forward. So I don’t know if you want to add to that.
Joel Dickson: I completely agree with that. And you think about even paying off student debt which we said, “Hey, paying off debt is saving,” which it absolutely is, but it is also investing. Think about the student loan that—let’s say it’s a 6% interest rate on the student loan. You’re actually kind of now not compounding that debt amount at 6% a year if you’re paying that off, so you’re kind of increasing your own return by 6% a year. Oftentimes we talk about a concept—and it goes to the school prioritization that we talked about earlier—of next dollar accumulation. If I have $100, where should I put it? Should I use it to invest for retirement? Should I use it to build my business? Should I use it to pay off student loans? And it’s kind of a calculation that often gets done about—well, on that $100 the kind of better after-tax sort of approach might be to pay off the student loan rather than invest. I shouldn’t really be saying this at Vanguard, but instead of investing in the 401(k) if you’re not getting a match, maybe paying off a student loan that’s costing you 6% or 8% a year is a better option. Whereas, if you aren’t contributing up to the match in the 401(k) and it’s a 50% match or a 100% match, well, then that’s a 50% return. You’d want to go there first before paying off the student loan. So it gets to be situational but gets to this priority and tradeoff of the goals that come with it. Thinking of it holistically, as Maria said earlier—not all-or-nothing for any one goal—that balance is really important.
Maria Bruno: Okay. I think this was a lot of fun.
Joel Dickson: We have a sick sense of fun, right?
Maria Bruno: Oh, yes. Yes.
Bridget: I have a question.
Maria Bruno: Yes.
Bridget: So from the beginning you talked about are we different or are we just younger investors? What do you think?
Maria Bruno: Oh, there’s the million-dollar question. I think a lot of what we talked about when I reflect, when I was 22 to 37 years old thinking through this, there’s a lot of similarities in terms of having to deal with current financial issues versus saving for retirement or other things like a home purchase. I do think what may be different, though, is—I think Tamara had mentioned it in terms of your investing experience or coming out of a global financial crisis. You may be taking on more debt than maybe some of the earlier cohorts may have, and maybe finding a job might be a little bit more difficult. So the challenges might be a little different and you might have a little bit more of a headwind because of that.
But what we’ve talked about, I remember thinking through when I was younger and even today, it’s a series of tradeoffs in terms of what I consume today, my budgeting in terms of what I invest. So I think it’s a little bit of both. And there’s actually a lot of pluses that you have today that we didn’t have in our generation. When I think about the 401(k) landscape and products within that, because of technology—for instance, target-date funds or the ability to defer and then have an auto increase every year where the savings or investing diligence is done for me—those things didn’t exist. And, also, when you think about what the default was in a 401(k), for instance. In our day, it was a money market account. Today, through plan design, it can be a balanced fund. So you’re investing, but these decisions are being made for you from the plan sponsor.
Tamara: The opt-out.
Joel Dickson: Instead of opt-in.
Maria Bruno: Yes, you’re actually in a better financial spot because of that. So, there are a couple things that—actually, there’s a lot of positives. I think it’s a little bit of both. That’s a long way of saying that. What are your thoughts, Joel?
Joel Dickson: I tend to go back to that a lot of the issues that we hear about being associated from a financial and investing standpoint with millennials are the same issues that when I was younger, when my parents were younger—this life cycle of whether it’s different goals, whether it’s different financial challenges along the way. What has changed, and Maria mentioned it, is over the last 40 years, there’s been a fundamental societal shift in the U.S. around investing. Whereas 40 years ago, it was assumed that your retirement would be taken care of for you in large measure through combinations of say Social Security, through when Medicare came in from a health care standpoint, and through employer-provided defined benefit plans, employer-provided income in retirement. What has shifted over the last roughly 40 years or so has been that we are now responsible for our own long-term planning. And so that leads to, “How do I think about myself and my goals today? How much do I need to think about when I am 65?” But that is so foreign a concept when you’re 25. Oh, how do I think about that—65? That’s why to a certain extent when we’ve been talking about just if you can put it on autopilot and just have a few things, then that can help with a little bit of the peace of mind of, oh, I don’t know what that future may hold. But we all have those different priorities and circumstances at any one point in time. But, yes, I think most of it is just younger investor sort of piece. Now, I will caveat that by saying to the extent that there are issues that lead to tradeoffs that maybe haven’t occurred—so the cost of postsecondary education, college education, has definitely skyrocketed. And to the extent that additional debt for those that go to college or some postsecondary education leads to then—Tamara, as we talk about different choices that might be made, if it might be delaying a house or delaying marriage and so forth because of some of those concerns—then there are some differences that are generational that have crept in because of the situation. But in terms of the concerns and how to look at it and trading off goals and what goals I’m thinking about—no, I think they’re fairly consistent through time.
Grace: Do you think that there’s the same pressure across generations to have your life together?
Maria Bruno: I think that’s a wrap.
Joel Dickson: Maybe. “Kids these days just don’t understand.” Yes, I sound like my parents. Every year I sound more and more like my parents. Those commercials where you finally buy the house or whatever and you start turning into your parents, yes, I certainly see that. Yes, Maria will tell you my fashion sense has totally gone to heck since, you know, as I get older.
Maria Bruno: No, I was thinking about Grace’s question. I think it’s different. I mean, I think at any point there’s pressures. And that’s the whole thing around financial planning, personal finance—and that’s a series of tradeoffs. The world is a difference place today than it was 20 years ago. It’ll be different 20 years from now, so what you will be facing will be different. And you’ll probably be sitting at the table with people that are 20 years behind you having this conversation as well, and then, also, people who are 20 years ahead of you in terms of how did you handle these types of things? So it’s completely natural. I think it’s just a matter of making sure that you understand what the issues are, what’s important, what’s not important, and ask questions. So I thank you but also congratulate you for joining us today and sharing your situations, because it seems like you want to learn more and be confident in your choices. And you’ll make mistakes along the way. We did.
Joel Dickson: Oh, yes.
Maria Bruno: And we still do, and we learn from it. And we share those experiences.
Bridget: Well, thank you for sharing with us because, like I said, some of this is so foreign to, at least, mine and Grace’s fields that we deal with every day.
Joel Dickson: Yes, but my guess is, Bridget, you kind of look at it and go, “I can’t believe these people don’t know this about health.”
Joel Dickson: Right? Exactly. So we all have that set of information and expertise, and we try to fill in as best we can and figuring it out along the way, as you said, Grace. Just figure it out along the way.
Tamara: Thanks for the therapy session with Joel.
Joel Dickson: Oh, yes.
Maria Bruno: Oh, please.
Tamara: Maybe I don’t want to buy a house.
Joel Dickson: Yes, great, Maria, you shattered a dream.
Maria Bruno: Now let me get home. It sounds like, yes, it’s not geographically desirable for you, Tamara. So that’s not an option for you.
Joel Dickson: Thanks, again, for joining us. We do appreciate the time.
Tamara: This was great.
Bridget: Thank you.
Maria Bruno: All right, great. Thank you very much for joining us in the studio today. Joel, thanks as always. I’d also like to thank our listeners.
For anyone who wants to learn more, we do have information on vanguard.com. As always, there’s a lot of information in terms of personal finance, investing choices. Our podcasts are on iTunes, vanguard.com, so some of what we talked about today we’ve covered in prior podcasts so that’s another resource.
Maria Bruno: Thanks, Joel. See you next time.
Joel Dickson: See you next time.
Maria Bruno: We hope you enjoyed this episode of The Planner and the Geek. Just a reminder that you can find more episodes of The Planner and the Geek – on iTunes and on vanguard.com.
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